One significant problem with background check companies’ (CRAs) business model today is they’ve been given a backseat to the hiring process. The driver today is Applicant Tracking Systems and HRMS, or in broader terms, MSP (Managed Service Providers). They more or less steer the relationship.
If CRAs don’t find a way to change this dynamic and get back in front of the hiring process, they’ll soon see a loss in customer loyalty and revenue. The MSP then ends up taking their business.
Being a major platform provider for CRAs with over 70 integrations to MSPs for over 300 end user companies from Exxon, United Airlines, UPS, Walmart, Target, Autonation, and more, we see the daily challenges our customers face from all aspects. We have identified the problem in the declining influence in the hiring process when compared to MSPs.
Here are examples:
A new hiring manager comes on the job from an established company with past relationships and soon you need to have an RFP response because they are reviewing their vendors for companies already integrated into MSP X. You don’t have that integration, but guess what competitor x does because of the previous relationship. Who’s going to win that one?
Your best salesperson has been working hard to land a decent account. They get to the final stages and and the client agrees that if the MSP will integrate, they will switch to you. But the MSP either closes down the conversation or prolongs the implementation time to make it unfeasible for a vendor switch. They have this amount of control over the hiring process: even if an end user client wants to switch, the MSP has the means to delay or prevent it.
You’ve had this great, profitable customer for 15 years. You’ve invested a lot of time and money into an integration with MSP X, but they find a new one more suited to their industry needs with hiring and you don’t currently have an integration with them. But guess what, that new MSP already has a preferred background check company that can do everything you do, with a proven track record and is eager for the business. What can you do?
The point is that CRAs have to face the fact that they are losing control, visibility and influence on some of their most important, profitable relationships. Today, HR can change on a dime, choose another MSP as well as change vendors. It’s getting that easy.
And believe me, the MSPs want it that way. They are eagerly looking for ways to monetize that relationship and controlling the vendors at an arm's length is perfect for them. Because they can drive down price, threaten to change, and ultimately own the relationship with the human resource department even closer than they do now.
Either the MSP is picking a few preferred vendors and really pushing their services with some nice revenue share built in. In this scenario the MSP stands to gain not only by revenue share arrangements, but by also getting to go downstream with their marketing to utilize existing relationships with the CRAs and gain more customers. The more preferred vendors the MSP has, the more opportunity to gain more customers and revenue share.
The second scenario has been for an MSP to pick one preferred vendor, integrate very closely and push this vendor to their clients. The advantage is a more cohesive process, less headache for the MSP, and a chance for larger revenue share for being exclusive. This of course is better for the CRA but less frequent because of the dynamics of the marketplace, and competition demanding multiple providers. We do have this scenario with one client. They are the exclusive provider to a major, vertical focused MSP and they are very successful. Still, the CRA does not have as much influence with the hiring process. The end users (some Fortune 500s), are loyal to the MSP. If they decide to change one day, it will be easy because we’ve helped them build a very flexible, repeatable integration that can rapidly take on new customers. All they need to do now is have another CRA create the integration, then point it their way. This would be a significant blow to our customer who is growing around 40 percent at the moment.
But then there’s this third BIG thing. From our unique vantage point as a platform provider we are seeing something else; numerous MSPs coming to us wanting to get in the business. Make no mistake, I mean MSPs wanting to purchase a background check platform so they can do the background checks themselves. Why not? Using a third party platform like deverus they can quickly, efficiently, and effectively get into the business with little upfront cost and rapid ramp up time. In a world where margins are thin, marketing and customer acquisition is expensive and competition is fierce, it’s an easy source of increased revenue and profit. With all the interest we’ve came across, we know they are smart, in a lot of cases heavily funded. They see the opportunity and are quick to respond.
Successful CRAs need to know this threat from the MSPs is real. If the trend continues, which most likely it will, they stand a big chance of either being replaced by another preferred vendor, forced to lower cost and margins, or risk losing their business to a MSP. So what are the options for CRAs?
Companies can ignore the changing marketplace and do nothing, but they won’t be in business for very long. This unfortunately, seems to be the strategy of many small CRAs who find it hard in theory to mount the marketing, sales and technical resources needed to play in the MSP integration marketplace. They are forced downstream and take on smaller business with some higher margins but more customer support and resources. This seems like a compromise and safe but it’s not because MSP are also going downstream.
Consider BambooHR, a company that created a $100 million dollar business by serving very small businesses. They make it so easy and affordable it’s a no brainer. They grew to $100 million without even offering background checks on their platform. Until now. They recently began researching the industry and are planning a big move into the background check space. So stay tuned; the threat here is that even if you do nothing and take the slim pickings of small businesses you are not safe because overnight an MSP can take your clients and either move to a preferred vendor or do the background check themselves.
You can do like most background check companies and “one-off” your integrations in a reactive fashion hoping to retain customers and eventually get new ones with this one integration built to MSP X. The challenge is in order to do “one-off” integrations you need to have technical resources, a lot of time and patience, and hope that the integration will eventually pay off. We’ve seen many cases where a CRA will pay for the integration and the number of applicants didn’t materialize. This brings up another problem. We are seeing CRAs invest in riskier integrations with newcomer MSPs in hopes of more business. This is because most larger, established MSPs already have their preferred vendors.
You can do what smarter, larger background check companies are doing and partner with ATS. You’ve still lost that primary relationship with HR and as loyal as the MSP seems, they will eventually want more revenue share and can threaten to move to another provider. It’s also getting harder because again, most MSPs already have preferred vendors and they are usually with the larger background check companies.
Yes, build your own MSP. We’ve created one called Vero Hire and our customers actually see a lot of success in retaining at least their smaller customers. The trick is to have just enough features and functionality to make them want to stay. This is hard because so many MSPs offer services ranging from benefits, payroll, performance reviews, and more. With this strategy we are basically fighting for smaller businesses and less revenue, but on the other hand, small businesses make up most of America’s economy, so there’s the logic.
We think this is the most viable of all options: creating new value-added options to fit the growing needs of the hiring process. It takes technology innovation, as well as marketing and technology resources. Yet, it’s an important strategy to secure existing revenue and build business. Some of these new services include mobile recruiting. The CRA offers a great mobile hiring experience for background checks, job posts and easy to use employee applications. Communication tools for the hiring process like text, voice AI, and smart notifications. An applicant portal where candidates can communicate directly with the CRA to check status, dispute records, fill in missing information, and get copies. All this plus services like I-9, drug screening, assessments, and exit interviews, and you’re offering real value.
Most CRAs have problems with integration because there are too many (?) to get into the system, the time it takes to implement, the resources to maintain them, and lowering margins. This a symptom, not the root problem. The biggest problem is the CRA’s place in the process. CRAs need to continue with integrations while finding new ways to go upstream to provide more services and value to the hiring process.
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